Why is it important to my business?
Directors must have the capacity to understand the financial status of their business and they have a duty to prevent their companies from trading when insolvent. They cannot outsource these duties (Baxt 2012, p. 136). They must be prepared to state that there are reasonable grounds to believe that the organisation will be able to pay its debts. The underlying economic transactions of a business must be recorded and reported correctly. It is the responsibility of the CEO and CFO to provide signed financial statements to the Board, declaring that the organisation’s financial records have been properly maintained and audited and that they comply with accounting standards and give a true and fair view of that business’ performance. Financial statements are relied upon by both investors and management and relevant information is required by investors to base their investment decisions on and for management to make business decisions. So for informed investment and business decisions to be made it is mandatory that financial statements are not misleading through information that has been, either, falsified, altered or concealed. If financial statements are consequently misleading management may make bad business decisions hindering financial performance of a organisation. This could also diminish the confidence of investors adversely impacting the operations of share markets. Those companies that fail to maintain adequate financial records to produce financial statements, will have committed an offence of strict liability for which reckless intention does not have to be proven. For those companies that provide false or misleading information to investors and shareholders, or trade whilst insolvent, individual directors can be held personally liable and face substantial fines or incarceration in jail.